TRANSPARENCY AND PRIVACY A DELICATE BALANCE

Battle lines have been drawn between the UK and its Overseas Territories, placing the Cayman Islands on a potential collision course with its parliamentary overlords, over the long running issue of beneficial ownership and how interests are reported and disseminated under local law.

When the UK moved forward the concept of public beneficial ownership registers for its Crown Dependencies and Overseas Territories in 2013, during its presidency of the OECD, Prime Minister David Cameron’s portrayal of offshore financial centres as facilitators of tax evasion, while economies were still reeling from post financial crisis austerity, generated both significant media attention and political capital. Where this initiative completely failed, was an understanding of the activities of highly regarded international financial centres. The Cayman Islands, for example, has for many years employed a superior means of recording beneficial ownership information, which isn’t open to manipulation – as the UK’s own system is – and provides proper protection for investors’ wholly legitimate.

Following a period of intensive lobbying, it seemed that the Cayman Islands had managed to convince the UK government of the merits of its system, whereby licensed corporate service providers don’t just record the beneficial owners of entities established in the jurisdiction, but rigorously check the validity of the information provided. This stands in contrast to the UK’s self-certification system of providing such information to Companies House. It doesn’t take a genius to understand that if criminals looking to evade the law and their legal tax responsibilities in the UK, decide to provide false information or no information at all, the UK Exchequer will be none the wiser. If an individual is intent on laundering money through the UK banking system, a self-certification system of beneficial ownership, which is not validated, provides little or no obstacle to such criminal enterprise.

When the UK announced in 2016 that its Crown Dependencies and Overseas Territories would be establishing central beneficial ownership registries that provide automatic access to law enforcement agencies, including the Serious Fraud Office and National Crime Agency, it was seen as a victory for the Cayman Islands. Significantly, the register would not be open to the public, but instead leaving the beneficial ownership information securely in the hands of licensed corporate services providers. Premier Alden 16 McLaughlin hailed the agreement as exactly what the Cayman government had been pushing for a period of over three years. International recognition of the strength of the Cayman system and avoiding a public central register, which in the absence of a global standard requiring such, would place Cayman at a distinct disadvantage in competitive terms with other jurisdictions.

The current system in Cayman involves licensed Cayman corporate service providers uploading beneficial information on their clients on a monthly basis to a secure platform. According to the Ministry of Financial Services, the security of Cayman’s technology has been third-party verified by a top global accounting firm and is safe and secure. “The Cayman Islands Government is confident in the authenticity of the beneficial ownership information held in the jurisdiction,” the Ministry said. “Through the monthly collection of decentralised information from licensed corporate service providers, Government can ensure the details held on its centralised platform are kept updated and made accessible to the necessary competent authorities under the appropriate circumstances.”

That’s why the surprise announcement in May 2018, that the Overseas Territories would be forced to introduce public registers, if they had not done so by 2020, has caused such alarm both for the government and the financial services industry. The whole episode is further compounded by the UK’s different constitutional relationship with its Crown Dependencies, which meant it would be unable to issue the same ‘order in council’ to force compliance in what is now a little over a year’s time, leaving Jersey Guernsey and the Isle of Man apparently, off the hook for now.

The Cayman Islands Ministry of Financial Services told Captive Insight that while it is aware of the UK government’s decision to require the Cayman Islands, as well as the other Overseas Territories, to establish a public register of beneficial ownership by 2020, it objects on the grounds that this act of the British Parliament is in conflict with the Cayman Islands Constitution. “Cayman’s Constitution provides a positive obligation on the Government to protect a person’s legitimate need for privacy with regard to their financial affairs,” the Ministry said.

The Cayman Islands Government is not opposed to having a public register,” the Ministry continued. “However, public registers do not exist in most countries and Government’s position is that a public register will not be introduced in the Cayman Islands until such registers are adopted as the global standard. Only EU countries are required to introduce public registers by 2020, under the 5th Anti Money Laundering Directive.”

In terms of direct action, the Cayman Islands Government said that the conflict with the Cayman Islands Constitution, which provides a positive obligation on the Government to protect a person’s legitimate need for privacy with regard to their financial affairs, means that if necessary, the Government would challenge the section of the UK Sanctions and Anti-Money Laundering Act in the Cayman Islands courts through an order in council.

“The Cayman Islands Government has long recognised the importance of maintaining beneficial ownership information, compiling this information on a private register with information only made available to law enforcement agencies upon request to satisfy their legitimate needs for access, such as to carry out a law enforcement investigation,” the Ministry of Financial Services said.

Despite all the protests and assuming that a full, public beneficial ownership registry is introduced by the Cayman Islands in2020, as demanded by the UK, the key questions for now are how will that impact the international insurance industry and what will companies need to do. Firstly it is important to note that under the current regime, which was introduced in July 2017, any entity that is licensed and overseen by CIMA is exempt from providing beneficial ownership information, in what one could suggest is appropriate as CIMA will have already completed enquiries and conducted a full review of the shareholders and directors. The large percentage of companies deemed exempt from providing information, however, raised concerns in the UK and the framework was then adjusted to force the exempted CIMA-licensed entities to report certain details. Instead of actually stating their beneficial owners, they are just required to state the reasons for their exemption.

In the run up to the UK’s deadline for a public register and a potential legal clash, debate will continue over whether it will have any negative impact on the financial services industry here. The Cayman Islands, meanwhile, remains confident in its approach and steadfast in its contribution of fighting financial fraud over a long time period, through being an active and compliant international partner in the fight against money laundering. “The Cayman Islands takes its place as a leader in global finance very seriously and recognises that beneficial ownership information – not provided publicly, but rather through proper legal channels to relevant authorities – does support the global fight against financial crimes,” a Ministry spokesperson said. “Government, therefore, has technologically enhanced Cayman’s system, so that local authorities have more timely access to beneficial ownership information on Cayman entities, in appropriate circumstances.”

As the tension increases between two extreme positions, which seemingly will have to come together at some point, it is difficult to argue with Cayman’s record as a centre of excellence in compliance and regulatory scrutiny. Whether it will continue to be a financial centre that protects the legitimate privacy of its clients in the years to come remains to be seen.